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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM 10-Q
-------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 26, 2006
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from .............. to ..............
1-13666
COMMISSION FILE NUMBER
-------------------------
DARDEN RESTAURANTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 59-3305930
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5900 LAKE ELLENOR DRIVE,
ORLANDO, FLORIDA 32809
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
407-245-4000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check
one):
[X] Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
[X] Yes [ ] No
Number of shares of common stock outstanding as of December 14, 2006:
145,188,789 (excluding 131,788,389 shares held in our treasury).
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DARDEN RESTAURANTS, INC.
TABLE OF CONTENTS
Page
Part I - Financial Information
Item 1. Financial Statements (Unaudited) 3
Consolidated Statements of Earnings 3
Consolidated Balance Sheets 4
Consolidated Statements of Changes in Stockholders'
Equity and Accumulated Other Comprehensive Income (Loss) 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
Item 4. Controls and Procedures 27
Part II - Other Information
Item 1. Legal Proceedings 28
Item 1A. Risk Factors 28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 6. Exhibits 30
Signatures 31
Index to Exhibits 32
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
QUARTER ENDED SIX MONTHS ENDED
----------------------------------------------------------------------------------------------------------------------------------
NOVEMBER 26, NOVEMBER 27, NOVEMBER 26, NOVEMBER 27,
2006 2005 2006 2006
----------------------------------------------------------------------------------------------------------------------------------
Sales $ 1,385,299 $ 1,325,093 $ 2,841,173 $ 2,734,260
Costs and expenses:
Cost of sales:
Food and beverage.......................................... 404,715 389,575 822,269 808,770
Restaurant labor........................................... 467,141 440,956 937,235 890,115
Restaurant expenses........................................ 218,489 215,081 442,165 429,775
------------ ------------ ------------ ------------
Total cost of sales, excluding restaurant depreciation
and amortization of $53,150, $50,600, $105,796 and
$101,020, respectively................................ $ 1,090,345 $ 1,045,612 $ 2,201,669 $ 2,128,660
Selling, general and administrative........................... 142,058 130,887 284,369 263,859
Depreciation and amortization................................. 56,620 54,761 113,364 108,899
Interest, net................................................. 10,283 11,670 20,551 22,618
Asset impairment, net......................................... 261 1,294 4,911 1,357
------------ ------------ ------------ ------------
Total costs and expenses................................. $ 1,299,567 $ 1,244,224 $ 2,624,864 $ 2,525,393
Earnings before income taxes..................................... 85,732 80,869 216,309 208,867
Income taxes..................................................... (24,070) (25,812) (66,104) (68,296)
------------ ------------ ------------ ------------
Net earnings..................................................... $ 61,662 $ 55,057 $ 150,205 $ 140,571
============ ============ ============ ============
Net earnings per share:
Basic......................................................... $ 0.42 $ 0.37 $ 1.04 $ 0.93
============ ============ ============ ============
Diluted....................................................... $ 0.41 $ 0.35 $ 1.00 $ 0.89
============ ============ ============ ============
Average number of common shares outstanding:
Basic......................................................... 145,300 149,600 145,100 151,400
============ ============ ============ ============
Diluted....................................................... 150,700 156,200 150,500 158,300
============ ============ ============ ============
----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
3
DARDEN RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
------------------------------------------------------------------------------------------
November 26, 2006 May 28, 2006
------------------------------------------------------------------------------------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents.......................... $ 38,400 $ 42,334
Receivables, net................................... 36,831 37,111
Inventories, net................................... 284,091 198,723
Prepaid expenses and other current assets.......... 34,496 29,889
Deferred income taxes.............................. 72,860 69,550
------------ ------------
Total current assets.......................... $ 466,678 $ 377,607
Land, buildings and equipment, net.................... 2,475,979 2,446,035
Other assets ......................................... 187,793 186,528
------------ ------------
Total assets.................................. $ 3,130,450 $ 3,010,170
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 214,890 $ 213,239
Short-term debt.................................... 140,000 44,000
Accrued payroll.................................... 98,665 123,176
Accrued income taxes............................... 64,468 64,792
Other accrued taxes................................ 47,462 46,853
Unearned revenues.................................. 91,449 100,761
Current portion of long-term debt.................. 149,983 149,948
Other current liabilities.......................... 286,611 283,309
------------ ------------
Total current liabilities..................... $ 1,093,528 $ 1,026,078
Long-term debt, less current portion.................. 493,174 494,653
Deferred income taxes................................. 82,267 90,573
Deferred rent......................................... 139,113 138,530
Other liabilities..................................... 43,372 30,573
------------ ------------
Total liabilities............................. $ 1,851,454 $ 1,780,407
------------ ------------
Stockholders' equity:
Common stock and surplus........................... $ 1,863,726 $ 1,806,367
Retained earnings.................................. 1,801,415 1,684,742
Treasury stock..................................... (2,357,745) (2,211,222)
Accumulated other comprehensive income (loss)...... (5,727) (5,570)
Unearned compensation.............................. (22,361) (44,186)
Officer notes receivable........................... (312) (368)
------------ ------------
Total stockholders' equity.................... $ 1,278,996 $ 1,229,763
------------ ------------
Total liabilities and stockholders' equity.... $ 3,130,450 $ 3,010,170
============ ============
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See accompanying notes to consolidated financial statements.
4
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
FOR THE SIX MONTHS ENDED NOVEMBER 26, 2006 AND NOVEMBER 27, 2005
(IN THOUSANDS)
(UNAUDITED)
---------------------------------------------------------------------------------------------------------------------
Common Accumulated
Stock Other
and Retained Treasury Comprehensive Unearned
Surplus Earnings Stock Income (Loss) Compensation
---------------------------------------------------------------------------------------------------------------------
Balance at May 28, 2006..................... $1,806,367 $1,684,742 $(2,211,222) $ (5,570) $ (44,186)
Comprehensive income:
Net earnings............................. -- 150,205 -- -- --
Other comprehensive income (loss):
Foreign currency adjustment.......... -- -- -- (1,039) --
Change in fair value of derivatives,
net of tax of $450.................. -- -- -- 882 --
Total comprehensive income.........
Cash dividends declared..................... -- (33,532) -- -- --
Stock option exercises (2,577 shares)....... 31,191 -- 3,197 -- --
Reclassification of unearned
compensation due to adoption of
SFAS No. 123(R)......................... (20,190) -- -- -- 20,190
Stock-based compensation.................... 14,543 -- -- -- --
ESOP note receivable repayments............. -- -- -- -- 1,610
Income tax benefits credited to equity...... 28,359 -- -- -- --
Purchases of common stock for treasury
(3,934 shares)........................... -- -- (150,201) -- --
Issuance of treasury stock under
Employee Stock Purchase and other
plans (92 shares)....................... 3,456 -- 481 -- --
Other....................................... -- -- -- -- 25
---------------------------------------------------------------------------------------------------------------------
Balance at November 26, 2006 $1,863,726 $1,801,415 $(2,357,745) $ (5,727) $ (22,361)
---------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------
Officer Total
Notes Stockholders'
Receivable Equity
--------------------------------------------------------------------------
Balance at May 28, 2006..................... $ (368) $1,229,763
Comprehensive income:
Net earnings............................. -- 150,205
Other comprehensive income (loss):
Foreign currency adjustment.......... -- (1,039)
Change in fair value of derivatives,
net of tax of $450.................. -- 882
-------------
Total comprehensive income......... 150,048
Cash dividends declared..................... -- (33,532)
Stock option exercises (2,577 shares)....... -- 34,388
Reclassification of unearned
compensation due to adoption of
SFAS No. 123(R)......................... -- --
Stock-based compensation.................... -- 14,543
ESOP note receivable repayments............. -- 1,610
Income tax benefits credited to equity...... -- 28,359
Purchases of common stock for treasury
(3,934 shares)........................... -- (150,201)
Issuance of treasury stock under
Employee Stock Purchase and other
plans (92 shares)....................... -- 3,937
Other....................................... 56 81
--------------------------------------------------------------------------
Balance at November 26, 2006 $ (312) $1,278,996
--------------------------------------------------------------------------
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Common Accumulated
Stock Other
and Retained Treasury Comprehensive Unearned
Surplus Earnings Stock Income (Loss) Compensation
-----------------------------------------------------------------------------------------------------------------------
Balance at May 29, 2005..................... $1,703,336 $1,405,754 $(1,784,835) $ (8,876) $ (41,685)
Comprehensive income:
Net earnings............................. -- 140,571 -- -- --
Other comprehensive income (loss):
Foreign currency adjustment.......... -- -- -- 2,163 --
Change in fair value of derivatives,
net of tax of $2,646................ -- -- -- 4,802 --
Total comprehensive income.........
Cash dividends declared..................... -- (29,854) -- -- --
Stock option exercises (1,888 shares)....... 25,644 -- 3,472 -- --
Issuance of restricted stock (403 shares),
net of forfeiture adjustments........... 12,735 -- -- -- (12,735)
Earned compensation......................... -- -- -- -- 2,962
ESOP note receivable repayments............. -- -- -- -- 2,175
Income tax benefits credited to equity...... 13,788 -- -- -- --
Purchases of common stock for treasury
(5,839 shares)........................... -- -- (188,270) -- --
Issuance of treasury stock under
Employee Stock Purchase and other
plans (122 shares)...................... 3,348 -- 784 -- --
Other....................................... -- -- -- -- --
-----------------------------------------------------------------------------------------------------------------------
Balance at November 27, 2005 $1,758,851 $1,516,471 $(1,968,849) $ (1,911) $ (49,283)
-----------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------
Officer Total
Notes Stockholders'
Receivable Equity
--------------------------------------------------------------------------
Balance at May 29, 2005..................... $ (675) $1,273,019
Comprehensive income:
Net earnings............................. -- 140,571
Other comprehensive income (loss):
Foreign currency adjustment.......... -- 2,163
Change in fair value of derivatives,
net of tax of $2,646................ -- 4,802
-------------
Total comprehensive income......... 147,536
Cash dividends declared..................... -- (29,854)
Stock option exercises (1,888 shares)....... -- 29,116
Issuance of restricted stock (403 shares),
net of forfeiture adjustments........... -- --
Earned compensation......................... -- 2,962
ESOP note receivable repayments............. -- 2,175
Income tax benefits credited to equity...... -- 13,788
Purchases of common stock for treasury
(5,839 shares)........................... -- (188,270)
Issuance of treasury stock under
Employee Stock Purchase and other
plans (122 shares)...................... -- 4,132
Other....................................... 186 186
--------------------------------------------------------------------------
Balance at November 27, 2005 $ (489) $1,254,790
--------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
5
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Quarter Ended Six Months Ended
--------------------------------------------------------------------------------------------------------------------------------
November 26, November 27, November 26, November 27,
2006 2005 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Cash flows-operating activities
Net earnings .................................................. $ 61,662 $ 55,057 $ 150,205 $ 140,571
Adjustments to reconcile net earnings to cash flows:
Depreciation and amortization .............................. 56,620 54,761 113,364 108,899
Asset impairment charge, net ............................... 261 1,294 4,911 1,357
Amortization of loan costs ................................. 457 909 900 1,801
Stock-based compensation expense ........................... 9,371 4,268 18,222 6,414
Change in current assets and liabilities ................... (88,881) (78,144) (123,112) (23,251)
Contributions to postretirement plan ....................... (139) (68) (324) (192)
(Gain)/loss on disposal of land, buildings and equipment ... (308) 951 487 1,573
Change in cash surrender value of trust owned life insurance (4,602) (2,234) (4,644) (3,410)
Deferred income taxes ...................................... (5,081) (3,920) (12,066) (13,700)
Change in deferred rent .................................... 8,961 1,714 4,003 3,969
Change in other liabilities ................................ (459) 1,247 (2,290) 1,545
Income tax benefits credited to equity ..................... -- 4,496 -- 13,788
Other, net ................................................. 34 1,719 1,693 7,693
---------- ---------- ---------- ------------
Net cash provided by operating activities ................ $ 37,896 $ 42,050 $ 151,349 $ 247,057
---------- ---------- ---------- ------------
Cash flows-investing activities
Sales (purchases) of short term investments ................... -- 90,000 -- (10,000)
Purchases of land, buildings and equipment .................... (86,714) (85,071) (182,283) (166,172)
Proceeds from disposal of land, buildings and equipment ....... 36,908 6,254 50,245 6,254
Increase in other assets ...................................... (937) (3,446) (1,173) (6,022)
---------- ---------- ---------- ------------
Net cash (used in) provided by investing activities ...... $ (50,743) $ 7,737 $ (133,211) $ (175,940)
---------- ---------- ---------- ------------
Cash flows-financing activities
Proceeds from issuance of common stock ........................ 26,927 13,014 37,302 32,073
Dividends paid ................................................ (33,532) (29,854) (33,532) (29,854)
Purchases of treasury stock ................................... (67,023) (55,132) (150,201) (188,270)
Income tax benefits credited to equity ........................ 19,324 -- 28,359 --
Proceeds from issuance of short-term debt ..................... 60,000 -- 96,000 --
Proceeds from issuance of long-term debt ...................... -- -- -- 294,669
ESOP note receivable repayment ................................ 750 1,187 1,610 2,175
Repayment of long-term debt ................................... (750) (151,187) (1,610) (152,175)
---------- ---------- ---------- ------------
Net cash provided by (used in) financing activities ...... $ 5,696 $ (221,972) $ (22,072) $ (41,382)
---------- ---------- ---------- ------------
(Decrease) increase in cash and cash equivalents ................. (7,151) (172,185) (3,934) 29,735
Cash and cash equivalents - beginning of period .................. 45,551 244,721 42,334 42,801
---------- ---------- ---------- ------------
Cash and cash equivalents - end of period ........................ $ 38,400 $ 72,536 $ 38,400 $ 72,536
========== ========== ========== ============
Cash flow from changes in current assets and liabilities
Receivables, net .............................................. (7,975) 1,923 280 (1,636)
Inventories, net .............................................. (75,439) (21,636) (85,369) (11,909)
Prepaid expenses and other current assets ..................... 3,293 3,283 (4,751) (3,787)
Accounts payable .............................................. 19,182 (19,224) 1,652 18,570
Accrued payroll ............................................... 3,732 3,332 (24,511) (11,965)
Accrued income taxes .......................................... (32,400) (46,779) (324) (8,411)
Other accrued taxes ........................................... (1,777) (5,567) 608 (2,267)
Unearned revenues ............................................. 5,401 4,525 (9,312) (7,386)
Other current liabilities ..................................... (2,898) 1,999 (1,385) 5,540
---------- ---------- ---------- ------------
Change in current assets and liabilities ................. $ (88,881) $ (78,144) $ (123,112) $ (23,251)
========== ========== ========== ============
--------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
6
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1. BACKGROUND
Darden Restaurants, Inc. (we, our or the Company) owns and operates casual
dining restaurants in the United States and Canada under the trade names Red
Lobster(R), Olive Garden(R), Bahama Breeze(R), Smokey Bones Barbeque & Grill(R)
and Seasons 52(R). We have prepared these consolidated financial statements
pursuant to the rules and regulations of the Securities and Exchange Commission
(the SEC). They do not include certain information and footnotes required by
U.S. generally accepted accounting principles for complete financial statements.
However, in the opinion of management, all adjustments considered necessary for
a fair presentation have been included and are of a normal recurring nature.
Operating results for the quarter and six months ended November 26, 2006 are not
necessarily indicative of the results that may be expected for the fiscal year
ending May 27, 2007.
These statements should be read in conjunction with the consolidated
financial statements and related notes to consolidated financial statements
included in our Annual Report on Form 10-K for the fiscal year ended May 28,
2006. The accounting policies used in preparing these consolidated financial
statements are the same as those described in our Form 10-K.
We prepare our consolidated financial statements in conformity with U.S.
generally accepted accounting principles. The preparation of these financial
statements requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of sales and expenses during the reporting period. Actual results could
differ from those estimates.
Certain amounts in prior periods' consolidated financial statements
presented herein have been reclassified to conform to the current quarter
consolidated financial statement presentation.
NOTE 2. CONSOLIDATED STATEMENTS OF CASH FLOWS
During the quarter and six months ended November 26, 2006, we paid $7,494
and $19,086, respectively, for interest (net of amounts capitalized) and $42,397
and $51,027, respectively, for income taxes. Interest income of $108 and $184,
respectively, associated with our cash and cash equivalents was recognized in
earnings as a component of interest, net, during the quarter and six months
ended November 26, 2006. During the quarter and six months ended November 27,
2005, we paid $10,798 and $18,415, respectively, for interest (net of amounts
capitalized) and $71,888 and $75,957, respectively, for income taxes. Interest
income of $1,076 and $1,995 associated with our cash and cash equivalents and
short-term investments was recognized in earnings as a component of interest,
net, during the quarter and six months ended November 27, 2005.
NOTE 3. LEASEBACK OF RESTAURANT SUPPORT CENTER
On August 24, 2006, we completed the sale and leaseback of our Restaurant
Support Center (RSC) for $45,250, $32,615 of which was received in cash during
the quarter ended November 26, 2006. The RSC houses all of our executive
offices, shared service functions and concept administrative personnel. The
transaction was completed in anticipation of moving the RSC to a new facility
approximately four years from the date of sale. As a result of the sale and
subsequent leaseback of the RSC, we recorded a $15,180 deferred gain, which is
being recognized over the four-year leaseback period on a straight-line basis.
NOTE 4. STOCK-BASED COMPENSATION
Effective May 29, 2006, we adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 123(R), "Share-Based Payment," which
requires companies to recognize in the financial statements the cost of employee
services received in exchange for awards of equity instruments based on the
grant date fair value of those
7
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
awards. Previously, SFAS No. 123, "Accounting for Stock-Based Compensation,"
encouraged, but did not require, that stock-based compensation be recognized as
an expense in companies' financial statements. Accordingly, we elected to
account for our stock-based compensation plans under an intrinsic value method
that required compensation expense to be recorded only if, on the date of grant,
the current market price of our common stock exceeded the exercise price the
employee must pay for the stock. Our policy is to grant stock options at the
fair market value of our underlying stock on the date of grant. Accordingly,
prior to the adoption of SFAS No. 123(R), no compensation expense had been
recognized for stock options granted under any of our stock plans because the
exercise price of all options granted was equal to the current market value of
our stock on the grant date. Due to the adoption of SFAS No. 123(R), for the
quarter and six months ended November 26, 2006 we recognized $4,339 ($2,682, net
of tax of $1,657) and $9,070 ($5,606, net of tax of $3,464), respectively, in
pre-tax stock-based compensation expense related to stock options and benefits
granted under our Employee Stock Purchase Plan, discussed below, which reduced
our diluted net earnings per share by $0.02 and $0.04, respectively.
Prior to the adoption of SFAS No. 123(R), benefits of tax deductions in
excess of recognized stock-based compensation expense were reported as operating
cash flows. Under SFAS No. 123(R), such excess tax benefits are reported as
financing cash flows. Although total cash flows are not impacted by the adoption
of SFAS No. 123(R) and remain unchanged from what would have been reported under
prior accounting standards, net operating cash flows were reduced by $19,324 and
$28,359, respectively, and net financing cash flows were increased by $19,324
and $28,359, respectively, during the quarter and six months ended November 26,
2006.
We adopted SFAS No. 123(R) according to the modified prospective
transition method and will use the Black-Scholes option pricing model to
estimate the fair value of awards. The modified prospective transition method
recognizes compensation expense over the remaining employee service period for
new awards granted after the effective date of SFAS No. 123(R) and for unvested
awards granted prior to the effective date of SFAS No. 123(R). We recognize
compensation expense on a straight-line basis over the requisite service period
of the award. In accordance with the modified prospective transition method,
financial statements issued for periods prior to the adoption of SFAS No. 123(R)
have not been restated.
Had we determined compensation expense for our stock options for the
quarter and six months ended November 27, 2005 based on the fair value at the
grant date as prescribed under SFAS No. 123, our net earnings and net earnings
per share would have been reduced to the pro forma amounts indicated below:
November 27, 2005
Quarter Ended Six Months Ended
--------------------------------------------------------------------------------------------------
Net earnings, as reported $ 55,057 $ 140,571
Add: Stock-based compensation expense included in
reported net earnings, net of related tax effects 1,676 2,552
Deduct: Total stock-based compensation expense
determined under fair value based method for all
awards, net of related tax effects (5,018) (10,424)
-------------------------------
Pro forma net earnings $ 51,715 $ 132,699
===============================
Basic net earnings per share
As reported $ 0.37 $ 0.93
Pro forma $ 0.35 $ 0.88
Diluted net earnings per share
As reported $ 0.35 $ 0.89
Pro forma $ 0.33 $ 0.84
==================================================================================================
8
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
The weighted-average fair value of options granted and the related
assumptions used in the Black-Scholes option pricing model as of November 26,
2006 upon adoption of SFAS No. 123(R) and as of November 27, 2005 for purposes
of pro-forma disclosure in connection with the provisions of SFAS No. 123, were
as follows:
Stock Options
Granted during Six Months Ended
----------------------------------------------------------------------------------------------------
November 26, 2006 November 27, 2005
----------------------------------------------------------------------------------------------------
Weighted-average fair value $13.76 $10.58
Risk-free interest rate 5.08% 3.91%
Expected volatility of stock 34.5% 30.0%
Dividend yield 1.30% 1.20%
Expected option life 6.4 years 6.0 years
====================================================================================================
We maintain one active stock option and stock grant plan under which new
awards may still be issued, the 2002 Stock Incentive Plan (2002 Plan). We also
have three other stock option and stock grant plans under which we no longer can
grant new awards, although awards outstanding under the plans may still vest and
be exercised in accordance with their terms: the Stock Plan for Directors
(Director Stock Plan), the Stock Option and Long-Term Incentive Plan of 1995
(1995 Plan) and the Restaurant Management and Employee Stock Plan of 2000 (2000
Plan). All of the plans are administered by the Compensation Committee of the
Board of Directors. The 2002 Plan provides for the issuance of up to 9,550
common shares in connection with the granting of non-qualified stock options,
incentive stock options, stock appreciation rights, restricted stock, restricted
stock units (RSUs), stock awards and other stock-based awards to key employees
and non-employee directors. The Director Stock Plan provided for the issuance of
up to 375 common shares out of our treasury in connection with the granting of
non-qualified stock options, restricted stock and RSUs to non-employee
directors. No new awards could be granted under the Director Stock Plan after
September 30, 2005. The 1995 Plan provided for the issuance of up to 33,300
common shares in connection with the granting of non-qualified stock options,
restricted stock or RSUs to key employees. The 2000 Plan provided for the
issuance of up to 5,400 shares of common stock out of our treasury as
non-qualified stock options, restricted stock or RSUs. As noted above, no new
awards may be made under the Director Stock Plan, the 1995 Plan or the 2000
Plan, although awards outstanding under those plans may still vest and be
exercised in accordance with their terms. Under all of the plans, stock options
are granted at a price equal to the fair value of the shares at the date of
grant for terms not exceeding ten years and have various vesting periods at the
discretion of the Compensation Committee. Outstanding options generally vest
over one to four years. Restricted stock and RSUs granted under the 1995 Plan,
2000 Plan and 2002 Plan generally vest over periods ranging from three to five
years and no sooner than one year from the date of grant. The restricted period
for certain grants may be accelerated based on performance goals established by
the Compensation Committee.
On June 16, 2006, the Board of Directors adopted amendments to the 2002
Plan, which were approved by our shareholders at the September 2006 annual
meeting of shareholders. The amendments, among other things: (a) increased the
maximum number of shares that are authorized for issuance under the 2002 Plan
from 8,550 to 9,550; (b) implemented a "fungible share pool" approach to manage
authorized shares in order to improve the flexibility of awards going forward,
and eliminated the limits on the number of restricted stock and RSU awards and
the number of awards to non-employee directors; and (c) provided that, in
determining the number of shares available for grant, a formula will be applied
such that all future awards other than stock options and stock appreciation
rights will be counted as double the number of shares covered by such award.
We also maintain the Compensation Plan for Non-Employee Directors. This
plan provided that non-employee directors could elect to receive their annual
retainer and meeting fees in any combination of cash, deferred cash or our
common shares and authorized the issuance of up to 106 common shares out of our
treasury for this purpose. The common shares were issued under the plan in
consideration of foregone retainer and meeting fees, and were issued at a value
equal to the market price. No new awards could be made under the Compensation
Plan for Non-Employee Directors after September 30, 2005.
9
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
On December 15, 2005, the Board of Directors approved the Director
Compensation Program, effective as of October 1, 2005, which replaced the
Director Stock Plan and the Compensation Plan for Non-Employee Directors. The
Director Compensation Program provides for payments to non-employee directors
of: (a) an annual retainer and meeting fees for regular or special Board
meetings and committee meetings; (b) an initial award of non-qualified stock
options to purchase 12.5 shares of common stock upon becoming a director of the
Company for the first time; (c) an additional award of non-qualified stock
options to purchase three shares of common stock annually upon election or
re-election to the Board; and (d) an annual award of common stock with a fair
market value of $100 on the date of grant. Directors may elect to have their
cash compensation paid in any combination of current or deferred cash, common
stock or salary replacement options. Deferred cash compensation may be invested
on a tax-deferred basis in the same manner as deferrals under the Company's
non-qualified deferred compensation plan. Directors may elect to have their
annual stock award paid in the form of common stock or cash, or a combination
thereof, or deferred. All stock options and other stock or stock-based awards
that are part of the compensation paid or deferred pursuant to the Director
Compensation Program are awarded under the 2002 Plan.
The following table presents a summary of the Company's stock option
activity as of and for the six months ended November 26, 2006:
Weighted-Average Weighted-Average Aggregate
Exercise Price Remaining Contractual Intrinsic
Options Per Share Life (Yrs) Value
------------------------------------------------------------------------------------------------------
Outstanding beginning of period 18,228 $ 19.15
------------------------------------------------------------------------------------------------------
Options granted 1,557 35.99
Options exercised (2,577) 13.34
Options cancelled (123) 27.66
------------------------------------------------------------------------------------------------------
Outstanding end of period 17,085 $ 21.50 5.78 $ 327,171
------------------------------------------------------------------------------------------------------
Exercisable 11,495 $ 17.62 4.54 $ 264,725
------------------------------------------------------------------------------------------------------
During the quarter and six months ended November 26, 2006, we recognized
$4,098 ($2,533, net of tax of $1,565) and $8,572 ($5,299, net of tax of $3,273),
respectively, in pre-tax stock-based compensation expense related to stock
options. The total intrinsic value of options exercised during the six months
ended November 26, 2006 and November 27, 2005 was $70,755 and $33,312,
respectively. Cash received from option exercises during the six months ended
November 26, 2006 and November 27, 2005 was $34,388 and $32,073, respectively.
As of November 26, 2006, there was $36,373 of unrecognized compensation
cost related to unvested stock options granted under our stock plans. This cost
is expected to be recognized over a weighted-average period of 1.9 years. The
total fair value of stock options that vested during the six months ended
November 27, 2006 was $16,544.
Restricted stock and RSUs are granted at a value equal to the market price
of our common stock on the date of grant. Restrictions lapse with regard to
restricted stock, and RSUs are settled in shares, at the end of their vesting
periods, which is generally four years. For the quarter and six months ended
November 26, 2006 we recognized $1,397 ($863, net of tax of $534) and $3,063
($1,893, net of tax of $1,170), respectively, in pre-tax stock-based
compensation expense related to restricted stock and RSUs.
10
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table presents a summary of the Company's restricted stock and RSU
activity as of and for the six months ended November 26, 2006:
Weighted-Average
Grant Date Fair
Shares Value Per Share
--------------------------------------------------------------------------------
Outstanding beginning of period 1,398 $ 25.06
--------------------------------------------------------------------------------
Shares granted 96 36.21
Shares vested (225) 23.61
Shares cancelled (44) 27.83
--------------------------------------------------------------------------------
Outstanding end of period 1,225 $ 26.10
--------------------------------------------------------------------------------
As of November 26, 2006, there was $18,961 of unrecognized compensation
cost related to unvested restricted stock and RSUs granted under our stock
plans. This cost is expected to be recognized over a weighted-average period of
2.0 years. The total fair value of restricted stock and RSUs that vested during
the six months ended November 26, 2006 was $5,324.
Darden stock units are granted at a value equal to the market price of our
common stock on the date of grant and generally will be settled in cash at the
end of their vesting periods, which range between four and five years, at the
then market price of our common stock. Compensation expense is measured based on
the market price of our common stock each period and is amortized over the
vesting period. For the quarter and six months ended November 26, 2006 we
recognized $2,358 ($1,457, net of tax of $901) and $2,654 ($1,640, net of tax of
$1,014), respectively, in pre-tax stock-based compensation expense related to
Darden stock units.
The following table presents a summary of the Company's Darden stock unit
activity as of and during the six months ended November 26, 2006:
Weighted-Average
Grant Date Fair
Units Value Per Share
--------------------------------------------------------------------------------
Outstanding beginning of period 675 $ 36.51
--------------------------------------------------------------------------------
Units granted 349 34.75
Units vested -- --
Units cancelled (47) 31.45
--------------------------------------------------------------------------------
Outstanding end of period 977 $ 40.25
--------------------------------------------------------------------------------
As of November 26, 2006, there was $18,757 of unrecognized compensation
cost related to Darden stock units granted under our incentive plans. This cost
is expected to be recognized over a weighted-average period of 3.7 years.
During the six months ended November 26, 2006, we issued 290 performance
stock units with a fair value on the date of grant of $35.81 per share that will
be settled in shares of the Company's stock upon vesting. The performance stock
units vest over a period of five years following the date of grant, and the
annual vesting target for each fiscal year is 20 percent of the total number of
units covered by the award. The number of units that actually vests each year
will be determined based on the achievement of Company performance criteria set
forth in the award agreement and may range from zero to 150 percent of the
annual target. Holders will receive one share of common stock for each
performance stock unit that vests. During the quarter and six months ended
November 26, 2006, we recognized $263 ($162, net of tax of $101) and $2,411
($1,490, net of tax of $921), respectively of pre-tax stock-based compensation
expense related to the vesting of performance stock units. As of November 26,
2006, there was $7,222 of unrecognized compensation cost related to unvested
performance stock units granted under our stock plans. This cost is expected to
be recognized over a weighted-average period of 4.5 years.
We maintain the Darden Restaurants, Inc. Employee Stock Purchase Plan to
provide eligible employees who have completed one year of service (excluding
senior officers subject to Section 16(b) of the Securities Exchange Act of 1934,
and certain other employees who are employed less than full time or own five
percent or
11
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
more of our capital stock or that of any subsidiary) an opportunity to invest up
to $5 per calendar quarter to purchase shares of our common stock, subject to
certain limitations. Under the plan, up to an aggregate of 3,600 shares are
available for purchase by employees at a purchase price that is 85 percent of
the fair market value of our common stock on either the first or last trading
day of each calendar quarter, whichever is lower. During the quarter and six
months ended November 26, 2006, we recorded $241 ($149, net of tax of $92) and
$498 ($308, net of tax of $190), respectively, of pre-tax stock-based
compensation expense related to the plan.
NOTE 5. PROVISION FOR IMPAIRED ASSETS
During the quarter and six months ended November 26, 2006, we recorded
charges of $10 and $1,637, respectively, for long-lived asset impairments
resulting from the decision to close, relocate or rebuild certain restaurants.
During the quarter and six months ended November 27, 2005, we recorded charges
of $1,114 and $1,187, respectively, for long-lived asset impairments resulting
from the decision to close, relocate or rebuild certain restaurants. During the
quarter and six months ended November 26, 2006, we also recorded charges of $491
and $3,569, respectively, for the write-down of carrying value of two Smokey
Bones restaurants, which we continue to operate. These impairments were measured
based on the amount by which the carrying amount of these assets exceeded their
fair value. Fair value is generally determined based on appraisals or sales
prices of comparable assets. During the quarter and six months ended November
26, 2006, we also recorded gains of $240 and $295, respectively, related to the
sale of previously impaired assets. During the quarter and six months ended
November 27, 2005, we also recorded losses of $180 and $170, respectively,
related to the sale of previously impaired assets.
NOTE 6. LONG-TERM DEBT
We maintain a credit facility under a Credit Agreement dated August 16,
2005 with a consortium of banks under which we can borrow up to $500,000. As
part of the Credit Agreement, we may request issuance of up to $100,000 in
letters of credit, the outstanding amount of which reduces the net borrowing
capacity under the agreement. The Credit Agreement allows us to borrow at
interest rates that vary based on a spread over (i) LIBOR or (ii) a base rate
that is the higher of the prime rate or one-half of one percent above the
federal funds rate, at our option. The interest rate spread over LIBOR is
determined by our debt rating. We may also request that loans be made at
interest rates offered by one or more of the banks, which may vary from the
LIBOR or base rate. The Credit Agreement supports our commercial paper borrowing
program and expires on August 15, 2010. We are required to pay a facility fee of
10 basis points per annum on the average daily amount of loan commitments by the
consortium. The amount of interest and annual facility fee are subject to change
based on our maintenance of certain debt ratings and financial ratios, such as
maximum debt to capital ratios. Advances under the Credit Agreement are
unsecured. As of November 26, 2006 and May 28, 2006, no borrowings under the
Credit Agreement were outstanding. However, as of November 26, 2006, there was
$140,000 of commercial paper and no letters of credit outstanding, which were
backed by this facility. As of November 26, 2006, we were in compliance with all
covenants under the Credit Agreement.
NOTE 7. NET EARNINGS PER SHARE
Outstanding stock options and restricted stock granted by us represent the
only dilutive effect reflected in diluted weighted average shares outstanding.
Options and restricted stock do not impact the numerator of the diluted net
earnings per share computation. Options to purchase 3,676 and 1,954 shares of
common stock were excluded from the calculation of diluted net earnings per
share for the quarters ended November 26, 2006 and November 27, 2005,
respectively, because the effect would have been antidilutive. Options to
purchase 3,471 and 1,941 shares of common stock were excluded from the
calculation of diluted net earnings per share for the six months ended November
26, 2006 and November 27, 2005, respectively, for the same reason.
NOTE 8. STOCKHOLDERS' EQUITY
Pursuant to the authorization of our Board of Directors to repurchase up
to 162,400 shares in accordance with applicable securities regulations, we
repurchased 1,630 and 3,934 shares of our common stock for $67,023 and
12
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
$150,201 during the quarter and six months ended November 26, 2006,
respectively, resulting in a cumulative repurchase of 136,462 shares as of
November 26, 2006.
NOTE 9. RETIREMENT PLANS
Components of net periodic benefit cost are as follows:
Defined Benefit Plans Postretirement Benefit Plan
-------------------------------------------------------------------------------------------------------------
Quarter Ended Quarter Ended
November 26, November 27, November 26, November 27,
2006 2005 2006 2005
-------------------------------------------------------------------------------------------------------------
Service cost $ 1,486 $ 1,321 $ 169 $ 159
Interest cost 2,252 2,016 252 233
Expected return on plan assets (3,426) (3,264) -- --
Amortization of unrecognized prior service cost 27 21 -- --
Recognized net actuarial loss 1,299 1,374 59 49
-------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 1,638 $ 1,468 $ 480 $ 441
=============================================================================================================
Defined Benefit Plans Postretirement Benefit Plan
-------------------------------------------------------------------------------------------------------------
Six Months Ended Six Months Ended
November 26, November 27, November 26, November 27,
2006 2005 2006 2005
-------------------------------------------------------------------------------------------------------------
Service cost $ 2,972 $ 2,621 $ 338 $ 340
Interest cost 4,504 4,032 504 466
Expected return on plan assets (6,852) (6,534) -- --
Amortization of unrecognized prior service cost 54 42 -- --
Recognized net actuarial loss 2,693 2,748 118 98
-------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 3,371 $ 2,909 $ 960 $ 904
=============================================================================================================
NOTE 10. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
During the quarter ended November 26, 2006, we entered into equity forward
contracts to hedge the risk of changes in future cash flows associated with the
unvested unrecognized Darden stock units granted during the first quarter of
fiscal 2007. The equity forward contracts will be settled at the end of the
vesting periods of their underlying Darden stock units, which range between four
and five years. The equity forward contracts, which are indexed to 144 shares of
our common stock, have a notional value of $5,928 and can only be net settled in
cash. In total, we have entered into equity forward contracts indexed to 474
shares or our common stock with a total notional value of $14,192. To the extent
the equity forward contracts are effective in offsetting the variability of the
hedged cash flows, changes in the fair value of the equity forward contracts are
not included in current earnings but are reported as accumulated other
comprehensive income (loss). A deferred gain of $2,490 related to the equity
forward contracts was recognized in accumulated other comprehensive income
(loss) at November 26, 2006. As the Darden stock units vest, we will effectively
de-designate the portion of the equity forward contracts that no longer
qualifies for hedge accounting, and changes in fair value associated with those
portions of the equity forward contracts will be recognized in current earnings.
Gains of $957 and $420 were recognized in earnings as a component of restaurant
labor during the quarters ended November 26, 2006 and November 27, 2005,
respectively. Gains of $943 and $511 were recognized in earnings as a component
of restaurant labor during the six months ended November 26, 2006 and November
27, 2005, respectively.
During the quarter ended November 26, 2006, we entered into commodity
swaps to reduce the risk of natural gas price fluctuations. To the extent these
derivatives are effective in offsetting the variability of the hedged cash
flows, changes in their fair value are not included in current earnings but are
reported as accumulated other comprehensive income (loss). These changes in fair
value are subsequently reclassified into earnings when the natural gas is
purchased and used by us in operations. The fair value of these contracts was a
net loss of $6 at November 26, 2006 and is expected to be reclassified from
accumulated other comprehensive income (loss) into restaurant expenses during
fiscal 2008. To the extent these derivatives are not effective in offsetting the
variability of the hedged cash flows, changes in their fair value are
immediately recognized in earnings as a component of restaurant expenses.
13
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 11. COMMITMENTS AND CONTINGENCIES
As collateral for performance on contracts and as credit guarantees to
banks and insurers, we are contingently liable pursuant to guarantees of
subsidiary obligations under standby letters of credit. As of November 26, 2006
and May 28, 2006, we had $75,038 and $77,181, respectively, of standby letters
of credit related to workers' compensation and general liabilities accrued in
our consolidated financial statements. As of November 26, 2006 and May 28, 2006,
we also had $11,454 and $12,625, respectively, of standby letters of credit
related to contractual operating lease obligations and other payments. All
standby letters of credit are renewable annually.
We are subject to private lawsuits, administrative proceedings and claims
that arise in the ordinary course of our business. A number of these lawsuits,
proceedings and claims may exist at any given time. These matters typically
involve claims from guests, employees and others related to operational issues
common to the restaurant industry and can also involve infringement of, or
challenges to, our trademarks. While the resolution of a lawsuit, proceeding or
claim may have an impact on our financial results for the period in which it is
resolved, we believe that the final disposition of the lawsuits, proceedings and
claims in which we are currently involved, either individually or in the
aggregate, will not have a material adverse effect on our financial position,
results of operations or liquidity. The following is a brief description of the
more significant of these matters. In view of the inherent uncertainties of
litigation, the outcome of any unresolved matters described below cannot be
predicted at this time, nor can the amount of any potential loss be reasonably
estimated.
Like other restaurant companies and retail employers, we have been faced
in a few states with allegations of purported class-wide wage and hour
violations. In August 2003, three former employees in Washington filed a
purported class action in Washington State Superior Court in Spokane County
alleging violations of Washington labor laws with respect to providing rest
breaks. The Court stayed the action and ordered the plaintiffs into our
mandatory arbitration program. We believe we provided the required meal and rest
breaks to our employees, and we intend to vigorously defend our position in this
case.
Beginning in 2002, a total of five purported class action lawsuits were
filed in Superior Courts of California (two each in Los Angeles County and
Orange County, and one in Sacramento County) in which the plaintiffs allege that
they and other current and former service managers, beverage and hospitality
managers and culinary managers were improperly classified as exempt employees
under California labor laws. The plaintiffs sought unpaid overtime wages and
penalties. Two of the cases were removed to arbitration under our mandatory
arbitration program, one was stayed to allow consideration of judicial
coordination with the other cases, one is proceeding as an individual claim, and
one remains a purported class action litigation matter. Although we believe we
correctly classified these employees, to avoid potentially costly and protracted
litigation, we agreed in fiscal 2006 to a settlement. Without admitting any
liability, we agreed to pay up to a maximum total of $11,000 to settle all five
cases, which was fully accrued as of May 28, 2006 and is included in other
current liabilities at November 26, 2006. The settlement agreement has received
preliminary court approval and we expect final court approval and payment of the
settlement proceeds to occur before the end of fiscal 2007.
On March 23, 2006, we received a notice that the staff of the U.S. Federal
Trade Commission (FTC) was conducting an inquiry into the marketing of gift
cards issued by us and other companies. We cooperated with the staff, provided
information and made some voluntary adjustments to the disclosure of dormancy
fees related to our gift cards. On July 26, 2006, we were notified that the FTC
staff had concluded that we had violated Section 5 of the FTC Act by allegedly
failing to give adequate notice to consumers that our gift cards, if not used
for 24 consecutive months, were subject to a gradual reduction in value by a
dormancy fee. We discontinued the imposition of dormancy fees on October 12,
2006 and informed the FTC staff of our action. On November 9, 2006, a member of
the FTC staff informed us that unless we entered into an administrative consent
order regarding gift card marketing, the FTC staff would recommend to the
Commission that it institute an administrative proceeding against us based on
our past practices. The proposed consent order and administrative complaint
primarily would impose disclosure requirements should we resume imposing
dormancy fees. Neither the proposed order nor the proposed complaint sought
monetary relief. We have not agreed to enter into the consent order, and do not
know whether an
14
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
administrative complaint will be brought against us. We believe our gift card
marketing practices have complied with all applicable laws, and if a compliant
is issued, we intend to vigorously defend our position.
NOTE 12. FUTURE APPLICATION OF ACCOUNTING STANDARDS
In March 2006, the Emerging Issues Task Force (EITF) issued EITF Issue
06-3, "How Taxes Collected from Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement (That is, Gross versus
Net Presentation)." Entities may adopt a policy of presenting sales taxes in the
income statement on either a gross or net basis. If taxes are significant, an
entity should disclose its policy of presenting taxes and the amount of taxes.
The guidance is effective for periods beginning after December 15, 2006. We
present sales net of sales taxes. Accordingly, this issue will not impact the
way we record these sales taxes in our consolidated financial statements.
In June 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of SFAS No. 109" (FIN 48). FIN 48 clarifies the accounting for
uncertain income tax positions accounted for in accordance with SFAS No. 109.
The interpretation stipulates recognition and measurement criteria in addition
to classification, interim period accounting and significantly expanded
disclosure provisions for uncertain tax positions that are expected to be taken
in a company's tax return. FIN 48 is effective for fiscal years beginning after
December 15, 2006. We have not yet determined the impact the adoption of FIN 48
will have, if any, on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans (an amendment of FASB
Statements No. 87, 88, 106 and 132R)." SFAS No. 158 is effective as of the end
of fiscal years ending after December 15, 2006. The purpose of SFAS No. 158 is
to improve the overall financial statement presentation of pension and other
postretirement plans, but does not impact the determination of net periodic
benefit cost or measurement of plan assets or obligations. SFAS No. 158 requires
companies to recognize the over or under funded status of the plan as an asset
or liability as measured by the difference between the fair value of the plan
assets and the benefit obligation and requires any unrecognized prior service
costs and actuarial gains and losses to be recognized as a component of
accumulated other comprehensive income (loss). Additionally, SFAS No. 158 no
longer allows companies to measure their plans as of any date other than as of
the end of their fiscal year, however, this provision is not effective for
companies until fiscal years ending after December 15, 2008. Since we measure
our plan assets and obligations on an annual basis, we will not be able to
determine the impact the adoption of SFAS No. 158 will have on our consolidated
financial statements until the end of the current fiscal year when such
valuation is completed. However, based on valuations performed in fiscal 2006,
had we been required to adopt the provisions of SFAS No. 158 as of May 28, 2006,
our defined benefit plans and postretirement benefit plan would have been $7,014
and ($17,690) over (under) funded, respectively. To recognize our over (under)
funded positions and to appropriately record our unrecognized prior service
costs and actuarial gains and losses as a component of accumulated other
comprehensive income (loss), we would have been required to decrease our
stockholders' equity by $34,506, on an after-tax basis.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when quantifying Misstatements in Current Year Financial
Statements" (SAB 108). SAB 108 is effective for the first fiscal year ending
after November 15, 2006. SAB 108 requires companies to evaluate the materiality
of identified unadjusted errors on each financial statement and related
financial statement disclosure using both the rollover approach and the iron
curtain approach, as those terms are defined in SAB 108. The rollover approach
quantifies misstatements based on the amount of the error in the current year
financial statement, whereas the iron curtain approach quantifies misstatements
based on the effects of correcting the misstatement existing in the balance
sheet at the end of the current year, irrespective of the misstatement's year(s)
of origin. Financial statements would require adjustment when either approach
results in quantifying a misstatement that is material. Correcting prior year
financial statements for immaterial errors would not require previously filed
reports to be amended. If a company determines that an adjustment to prior year
financial statements is required upon adoption of SAB 108 and does not elect to
restate its previous financial statements, then it must recognize the cumulative
effect of applying SAB 108 in fiscal 2007 beginning balances of
15
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
the affected assets and liabilities with a corresponding adjustment to the
fiscal 2007 opening balance in retained earnings. We are currently evaluating
the impact of SAB 108 on our consolidated financial statements.
NOTE 13. SUBSEQUENT EVENT
In December 2006, employees and several hundred customers of a single
Olive Garden restaurant in Indianapolis, Indiana became ill as a result of what
local health authorities have identified as a norovirus, a stomach flu-like
illness, similar to viruses that have impacted the cruise ship industry in
recent years. The restaurant was subsequently closed, sanitized and reopened for
business on December 19, 2006, following approval by local health officials. No
reports of norovirus illness were received from any of our other restaurants
during this time. We received notice of claims, including one lawsuit, related
to customer illnesses; however, the nature and extent of our financial exposure
to these claims cannot yet be determined. We expect claims and damages resulting
from this single occurrence will be covered under our general liability
insurance, which is subject to a deductible of $250. Accordingly, we do not
expect the disposition of these claims to have a material impact on our
financial position, results of operations or cash flows.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion and analysis below for the Company should be read in
conjunction with the unaudited financial statements and the notes to such
financial statements included elsewhere in this Form 10-Q. The discussion below
contains forward looking statements which should be read in conjunction with
"Forward-Looking Statements" included elsewhere in this Form 10-Q. The following
table sets forth selected operating data as a percent of sales for the periods
indicated. All information is derived from the consolidated statements of
earnings for the quarters and six months ended November 26, 2006 and November
27, 2005.
Quarter Ended Six Months Ended
-------------------------------------------------------------------------------------------------------------
November 26, November 27, November 26, November 27,
2006 2005 2006 2005
-------------------------------------------------------------------------------------------------------------
Sales ........................................... 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales:
Food and beverage .......................... 29.2 29.4 28.9 29.6
Restaurant labor ........................... 33.7 33.3 33.0 32.6
Restaurant expenses ........................ 15.8 16.2 15.6 15.7
----- ----- ----- -----
Total cost of sales, excluding restaurant
depreciation and amortization of 3.8%,
3.8%, 3.7% and 3.7%, respectively ..... 78.7% 78.9% 77.5% 77.9%
Selling, general and administrative .......... 10.3 9.9 10.0 9.7
Depreciation and amortization ................ 4.1 4.1 4.0 4.0
Interest, net ................................ 0.7 0.9 0.7 0.8
Asset impairment, net ........................ -- 0.1 0.2 --
----- ----- ----- -----
Total costs and expenses ............... 93.8% 93.9% 92.4% 92.4%
----- ----- ----- -----
Earnings before income taxes .................... 6.2 6.1 7.6 7.6
Income taxes .................................... (1.7) (1.9) (2.3) (2.5)
----- ----- ----- -----
Net earnings .................................... 4.5% 4.2% 5.3% 5.1%
===== ===== ===== =====
-------------------------------------------------------------------------------------------------------------
OVERVIEW OF OPERATIONS
Our sales were $1.39 billion and $2.84 billion for the second quarter and
first six months of fiscal 2007, respectively, compared to $1.33 billion and
$2.73 billion for the second quarter and first six months of fiscal 2006,
respectively. The 4.5 percent and 3.9 percent increases in sales for the second
quarter and first six months of fiscal 2007, respectively, were driven primarily
by increased U.S. same-restaurant sales at Olive Garden and a net increase of 45
company-owned restaurants since the second quarter of fiscal 2006. For the
second quarter of fiscal 2007, our net earnings were $62 million compared to $55
million for the second quarter of fiscal 2006, a 12.0 percent increase, and our
diluted net earnings per share were $0.41 for the second quarter of fiscal 2007
compared to $0.35 for the second quarter of fiscal 2006, a 17.1 percent
increase. For the first six months of fiscal 2007, our net earnings were $150
million compared to $141 million for the first six months of fiscal 2006, a 6.9
percent increase, and our diluted net earnings per share were $1.00 for the
first six months of fiscal 2007 compared to $0.89 for the first six months of
fiscal 2006, a 12.4 percent increase.
Olive Garden reported its 49 th consecutive quarter of U.S.
same-restaurant sales growth during the second quarter of fiscal 2007 with a 2.9
percent increase. Olive Garden continues to focus on providing an excellent
guest experience and is on pace with its plan for accelerated new restaurant
growth. Red Lobster's U.S. same-restaurant sales for the second quarter of
fiscal 2007 increased 0.7 percent. Red Lobster delivered profitable growth while
improving the guest experience. Bahama Breeze's same-restaurant sales increased
0.1 percent in the second quarter of fiscal 2007 while making progress on plans
to open at least one new restaurant in fiscal 2008. Smokey Bones same-restaurant
sales decreased 5.0 percent in the second quarter of fiscal 2007. However, in
November 2006,
17
Smokey Bones opened a new repositioned restaurant in Cuyahoga Falls, Ohio, named
Rocky River Grillhouse, to test changes designed to broaden guest appeal and
increase visit frequency.
Effective May 29, 2006, we adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 123(R), "Share-Based Payment," which
requires companies to recognize in the financial statements the cost of employee
services received in exchange for awards of equity instruments based on the
grant date fair value of those awards. We adopted SFAS No. 123(R) using the
modified prospective transition method and will use the Black-Scholes option
pricing model to estimate the fair value of awards granted. The modified
prospective transition method recognizes compensation expense over the remaining
employee service period for new awards granted after the effective date of SFAS
No. 123(R) and for unvested awards issued prior to the effective date of SFAS
No. 123(R). In accordance with the modified prospective transition method,
financial statements issued for periods prior to the adoption of SFAS No. 123(R)
have not been restated.
We recognized total stock-based compensation of $9 million and $18 million
for the quarter and six months ended November 26, 2006, respectively, and $4
million and $6 million for the quarter and six months ended November 27, 2005,
respectively. The increase in total stock-based compensation was primarily due
to $4 million and $9 million, respectively, in incremental stock-based
compensation expense during the quarter and six months ended November 26, 2006
due to the adoption of SFAS No. 123(R) related to stock options and benefits
granted under our Employee Stock Purchase Plan. In addition, we recognized $2
million in incremental expense during the first quarter of fiscal 2007 related
to restricted stock, Darden stock units and performance stock unit awards, which
have always been required to be recognized as a component of net earnings.
SALES
Sales were $1.39 billion and $1.33 billion for the quarters ended November
26, 2006 and November 27, 2005, respectively. The 4.5 percent increase in sales
for the second quarter of fiscal 2007 was primarily due to increased U.S.
same-restaurant sales at Olive Garden and Red Lobster and a net increase of 45
company-owned restaurants since the second quarter of fiscal 2006. Olive
Garden's sales of $662 million were 7.1 percent above last year's second
quarter, driven primarily by a 2.9 percent increase in U.S. same-restaurant
sales and its 27 net new restaurants in operation since the second quarter of
last year. Olive Garden achieved its 49 th consecutive quarter of U.S.
same-restaurant sales growth primarily as a result of a 1.6 percent increase in
same-restaurant guest counts and a 1.3 percent increase in average check. Red
Lobster sales of $597 million were 1.4 percent above last year's second quarter,
which resulted primarily from a 0.7 percent increase in U.S. same-restaurant
sales and a net increase of three company owned restaurants. The increase in
U.S. same-restaurant sales resulted primarily from a 1.3 percent decrease in
same-restaurant guest counts and a 2.0 percent increase in average check. Bahama
Breeze sales of $36 million were 0.1 percent above last year's second quarter
driven by a 0.1 percent increase in same-restaurant sales. Smokey Bones sales of
$81 million were 5.0 percent above last year's second quarter as a result of its
12 net new restaurants in operation since the second quarter of last year. Same
restaurant sales at Smokey Bones decreased 5.0 percent compared to the second
quarter of fiscal 2006.
Sales were $2.84 billion and $2.73 billion for the six months ended
November 26, 2006 and November 27, 2005, respectively. The 3.9 percent increase
in sales for the first six months of fiscal 2007 was primarily due to increased
U.S. same-restaurant sales at Olive Garden and a net increase of 45
company-owned restaurants since the second quarter of fiscal 2006. Olive
Garden's sales of $1.35 billion were 6.7 percent above last year, driven
primarily by a 2.9 percent increase in U.S. same-restaurant sales and its 27 net
new restaurants in operation since the second quarter of fiscal 2006. The
increase in U.S. same-restaurant sales resulted primarily from a 1.6 percent
increase in same-restaurant guest counts and a 1.3 percent increase in average
check. Red Lobster sales of $1.23 billion were 0.3 percent above last year,
which resulted primarily from a net increase of three company owned restaurants,
partially offset by a 0.9 percent decrease in U.S. same-restaurant sales. The
decrease in U.S. same-restaurant sales resulted primarily from a 2.7 percent
decrease in same-restaurant guest counts, partially offset by a 1.8 percent
increase in average check. Bahama Breeze sales of $82 million were 0.7 percent
above last year, driven by a 0.7 percent increase in same-restaurant sales.
Smokey Bones sales of $169 million were 6.4 percent above last year primarily as
a result of its 12 net new restaurants in operation since the second quarter of
fiscal 2006. Same- restaurant sales at Smokey Bones decreased 6.3 percent in the
first six months of fiscal 2007 compared to the same period last year.
18
COSTS AND EXPENSES
Total costs and expenses were $1.30 billion and $1.24 billion for the
quarters ended November 26, 2006 and November 27, 2005, respectively. As a
percent of sales, total costs and expenses decreased from 93.9 percent in the
second quarter of fiscal 2006 to 93.8 percent in the second quarter of fiscal
2007.
Food and beverage costs increased $15 million, or 3.9 percent, from $390
million to $405 million in the second quarter of fiscal 2007 compared to the
second quarter of fiscal 2006. As a percent of sales, food and beverage costs
decreased in the second quarter of fiscal 2007 primarily as a result of lower
commodity costs principally related to chicken and dairy purchases. Food and
beverage costs, as a percent of sales, also decreased as a result of the larger
contribution by Olive Garden, which has historically had lower food and beverage
costs, to our overall sales and operating results. Restaurant labor increased
$26 million, or 5.9 percent, from $441 million to $467 million in the second
quarter of fiscal 2007 compared to the second quarter of fiscal 2006. As a
percent of sales, restaurant labor costs increased in the second quarter of
fiscal 2007 primarily as a result of an increase in wage rates and an increase
in FICA taxes on higher reported tips, which were partially offset by increased
sales leverage at Olive Garden and Red Lobster and lower restaurant level
bonuses at Olive Garden and Red Lobster. The increase in FICA tax expense on
higher reported tips is fully offset at the consolidated net earnings level by a
corresponding income tax credit, which reduces income tax expense. Restaurant
labor costs, as a percent of sales, also increased as a result of the larger
contribution by Olive Garden, which has historically had higher restaurant labor
costs, to our overall sales and operating results. Restaurant expenses (which
include lease, property tax, maintenance, credit card, utility, workers'
compensation, insurance, new restaurant pre-opening and other restaurant-level
operating expenses) increased $3 million, or 1.6 percent, from $215 million to
$218 million in the second quarter of fiscal 2007 compared to the second quarter
of fiscal 2006. As a percent of sales, restaurant expenses decreased in the
second quarter of fiscal 2007 primarily as a result of lower workers'
compensation expenses and lower new restaurant pre-opening expenses at Smokey
Bones and Red Lobster due to opening fewer new restaurants, which were partially
offset by higher general liability expenses and a decrease in sales leverage at
Smokey Bones.
Selling, general and administrative expenses increased $11 million, or 8.5
percent, from $131 million to $142 million in the second quarter of fiscal 2007
compared to the second quarter of fiscal 2006. As a percent of sales, selling,
general and administrative expenses increased in the second quarter of fiscal
2007 primarily as a result of stock-based compensation expenses related to the
adoption of SFAS No. 123(R), partially offset by increased sales leverage at
Olive Garden and Red Lobster.
Depreciation and amortization expense increased $2 million, or 3.4
percent, from $55 million to $57 million in the second quarter of fiscal 2007
compared to the second quarter of fiscal 2006. As a percent of sales,
depreciation and amortization expense was comparable between the second quarter
of fiscal 2007 and the second fiscal quarter of fiscal 2006 as new restaurant
activity was offset by increased sales leverage at Olive Garden and Red Lobster.
Net interest expense decreased $1 million, or 11.9 percent, from $11
million to $10 million in the second quarter of fiscal 2007. As a percent of
sales, net interest expense decreased in the second quarter of fiscal 2007
primarily as a result of lower average debt balances in fiscal 2007 and
increased sales leverage at Olive Garden and Red Lobster.
Net asset impairment charges were $261 thousand in the second quarter of
fiscal 2007 compared to $1 million in the second quarter of fiscal 2006. As a
percent of sales, net asset impairment charges decreased in the second quarter
of fiscal 2007 primarily as a result of closing three Red Lobster restaurants
during the second quarter of fiscal 2006.
Total costs and expenses were $2.62 billion and $2.53 billion for the six
months ended November 26, 2006 and November 27, 2005, respectively. As a percent
of sales, total costs and expenses for the first six months of fiscal 2007 were
comparable to the first six months of fiscal 2006.
Food and beverage costs increased $13 million, or 1.7 percent, from $809
million to $822 million in the first six months of fiscal 2007 compared to the
first six months of fiscal 2006. As a percent of sales, food and beverage costs
decreased in the first six months of fiscal 2007 primarily as a result of lower
commodity costs principally related to chicken and dairy purchases and a
favorable menu-mix. Food and beverage costs, as a percent of sales, also
decreased as a result of the larger contribution by Olive Garden, which has
historically had lower food
19
and beverage costs, to our overall sales and operating results. Restaurant labor
costs increased $47 million, or 5.3 percent, from $890 million to $937 million
in the first six months of fiscal 2007 compared to the first six months of
fiscal 2006. As a percent of sales, restaurant labor costs increased in the
first six months of fiscal 2007 primarily as a result of an increase in wage
rates and an increase in FICA taxes on higher reported tips, which was partially
offset by increased sales leverage at Olive Garden and Red Lobster and lower
restaurant level bonuses at Olive Garden and Red Lobster. The increase in FICA
tax expense on higher reported tips is fully offset at the consolidated net
earnings level by a corresponding income tax credit, which reduces income tax
expense. Restaurant labor costs, as a percent of sales, also increased as a
result of the larger contribution by Olive Garden, which has historically had
higher restaurant labor costs, to our overall sales and operating results.
Restaurant expenses increased $12 million, or 2.9 percent, from $430 million to
$442 million in the first six months of fiscal 2007 compared to the first six
months of fiscal 2006. As a percent of sales, restaurant expenses decreased in
the first six months of fiscal 2007 primarily as a result of lower workers'
compensation expenses and lower new restaurant pre-opening expenses at Smokey
Bones and Red Lobster, which were partially offset by higher utility expenses
and unfavorable sales leverage at Smokey Bones.
Selling, general and administrative expenses increased $20 million, or 7.8
percent, from $264 million to $284 million in the first six months of fiscal
2007 compared to the first six months of fiscal 2006. As a percent of sales,
selling, general and administrative expenses increased in the first six months
of fiscal 2007 primarily as a result of stock-based compensation expenses
related to the adoption of SFAS No. 123(R), partially offset by increased sales
leverage at Olive Garden and Red Lobster.
Depreciation and amortization expense increased $4 million, or 4.1
percent, from $109 million to $113 million in the first six months of fiscal
2007 compared to the first six months of fiscal 2006. As a percent of sales,
depreciation and amortization expense was comparable between the first six
months of 2007 and the first six months of 2006 as new restaurant activity was
offset by increased sales leverage at Olive Garden and Red Lobster.
Net interest expense decreased $2 million, or 9.1 percent, from $23
million to $21 million in the first six months of fiscal 2007 compared to the
first six months of fiscal 2006. As a percent of sales, net interest expense
decreased in the first six months of fiscal 2007 primarily as a result of lower
average debt balances in fiscal 2007 and increased sales leverage at Olive
Garden and Red Lobster.
Net asset impairment charges were $5 million in the first six months of
fiscal 2007 compared to $1 million in the first six months of fiscal 2006. As a
percent of sales, net asset impairment charges increased in the first six months
of fiscal 2007 primarily as a result of the impairment of three Smokey Bones
restaurants during the period.
INCOME TAXES
The effective income tax rate for the second quarter and first six months
of fiscal 2007 was 28.1 percent and 30.6 percent, respectively, compared to an
effective income tax rate of 31.9 percent and 32.7 in the second quarter and
first six months of fiscal 2006, respectively. The rate decrease in fiscal 2007
was primarily due to an increase in FICA tax credits for employee-reported tips
that we expect to receive for fiscal 2007 and a decrease in our federal
effective income tax rate resulting from the favorable resolution of prior year
tax matters, partially offset by an increase in our effective state income tax
rate resulting from the unfavorable resolution of prior year tax matters.
NET EARNINGS AND NET EARNINGS PER SHARE
For the second quarter of fiscal 2007, our net earnings were $62 million
compared to $55 million in the second quarter of fiscal 2006, a 12.0 percent
increase, and our diluted net earnings per share were $0.41 compared to $0.35 in
the second quarter of fiscal 2006, a 17.1 percent increase. At Olive Garden,
increased sales and lower restaurant expenses as a percent of sales more than
offset increased food and beverage costs, restaurant labor costs, selling,
general and administrative expenses and depreciation expenses as a percent of
sales, resulting in increased operating profit for Olive Garden in the second
quarter of fiscal 2007. At Red Lobster, increased sales and lower food and
beverage costs, restaurant expenses and depreciation expenses as a percent of
sales more than offset higher restaurant labor costs and selling, general and
administrative expenses as a percent of sales. As a result, Red Lobster had an
operating profit increase in the second quarter of fiscal 2007 compared to the
second quarter of fiscal 2006. The increase in both our net earnings and diluted
net earnings per share for the second quarter of fiscal 2007 was primarily due
to increased U.S. same-restaurant sales at Olive Garden and Red Lobster, new
restaurant growth and
20
decreases in our consolidated food and beverage costs and restaurant expenses as
a percent of sales, which more than offset increased restaurant labor expenses
and selling, general and administrative expenses as a percent of sales.
For the first six months of fiscal 2007, our net earnings were $150
million compared to $141 million for the first six months of fiscal 2006, a 6.9
percent increase, and our diluted net earnings per share were $1.00 compared to
$0.89 in the first six months of fiscal 2006, a 12.4 percent increase. At Olive
Garden, increased sales and lower food and beverage costs and restaurant
expenses as a percent of sales more than offset increased restaurant labor
costs, selling, general and administrative expenses and depreciation expenses as
a percent of sales, resulting in increased operating profit over the first six
months of fiscal 2006. At Red Lobster, increased sales and lower food and
beverage costs, restaurant expenses and depreciation expenses as a percent of
sales more than offset higher restaurant labor expenses and selling, general and
administrative expenses as a percent of sales. As a result, Red Lobster had an
operating profit increase in the first six months of fiscal 2007 compared to the
first six months of fiscal 2006. The increase in both our net earnings and
diluted net earnings per share for the first six months of fiscal 2007 was
primarily due to increased U.S. same-restaurant sales at Olive Garden, new
restaurant growth and decreases in our consolidated food and beverage costs and
restaurant expenses as a percent of sales, which more than offset increased
restaurant labor expenses and selling, general and administrative expenses as a
percent of sales.
SEASONALITY
Our sales volumes fluctuate seasonally. During fiscal 2006 and 2005, our
sales were highest in the spring and winter, followed by the summer, and lowest
in the fall. During fiscal 2004, our sales were highest in the spring, lowest in
the fall, and comparable during winter and summer. Holidays, the timing of
promotions, severe weather and similar conditions may impact sales volumes
seasonally in some operating regions. Because of the seasonality of our
business, results for any quarter are not necessarily indicative of the results
that may be achieved for the full fiscal year.
NUMBER OF RESTAURANTS
The following table details the number of restaurants open at the end of
the second quarter of fiscal 2007, compared with the number open at the end of
fiscal 2006 and the end of the second quarter of fiscal 2006.
-------------------------------------------------------------------------------------------------
NOVEMBER 26, 2006 MAY 28, 2006 NOVEMBER 27, 2005
-------------------------------------------------------------------------------------------------
Red Lobster - USA ................. 651 651 647
Red Lobster - Canada .............. 30 31 31
----- ----- -----
Total ........................ 681 682 678
----- ----- -----
Olive Garden - USA ................ 589 576 562
Olive Garden - Canada ............. 6 6 6
----- ----- -----
Total ........................ 595 582 568
----- ----- -----
Bahama Breeze ..................... 32 32 32
Smokey Bones ...................... 129 126 117
Seasons 52 ........................ 6 5 3
----- ----- -----
Total ........................ 1,443 1,427 1,398
===== ===== =====
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LIQUIDITY AND CAPITAL RESOURCES
Cash flows generated from operating activities provide us with a
significant source of liquidity, which we use to finance the purchases of land,
buildings and equipment, to pay dividends and to repurchase shares of our common
stock. Since substantially all of our sales are for cash and cash equivalents
and accounts payable are generally due in five to 30 days, we are able to carry
current liabilities in excess of current assets. In addition to cash flows from
operations, we use a combination of long-term and short-term borrowings to fund
our capital needs.
Our commercial paper program serves as our primary source of short-term
financing. To support our commercial paper program, we have a credit facility
under a Credit Agreement dated August 16, 2005, with a consortium of banks,
under which we can borrow up to $500 million. As part of this credit facility,
we may request
21
issuance of up to $100 million in letters of credit. The borrowings and letters
of credit obtained under the Credit Agreement may be denominated in U.S. dollars
or other currencies approved by the banks. The Credit Agreement allows us to
borrow at interest rates that vary based on a spread over (i) LIBOR or (ii) a
base rate that is the higher of the prime rate or one-half of one percent above
the federal funds rate, at our option. The interest rate spread over LIBOR is
determined by our debt rating. We may also request that loans be made at
interest rates offered by one or more of the banks, which may vary from the
LIBOR or base rate. The credit facility expires on August 15, 2010, and contains
various restrictive covenants, including a leverage test that requires us to
maintain a ratio of consolidated total debt to consolidated total capitalization
of less than 0.65 to 1.00 and a limitation on secured debt and debt owed by
subsidiaries, subject to certain exceptions, of 10 percent of our consolidated
tangible net worth. The credit facility does not, however, contain a prohibition
on borrowing in the event of a ratings downgrade or a Material Adverse Effect,
as defined in the Credit Agreement. None of these covenants is expected to limit
our liquidity or capital resources. As of November 26, 2006, we were in
compliance with all covenants under the Credit Agreement. As of November 26,
2006 and May 28, 2006, no borrowings under the Credit Agreement were
outstanding. However, as of November 26, 2006 there was $140 million of
commercial paper and no letters of credit outstanding, which were backed by this
facility.
At November 26, 2006, our long-term debt consisted principally of:
o $150 million of unsecured 4.875 percent senior notes due in August
2010;
o $75 million of unsecured 7.450 percent medium-term notes due in April
2011;
o $100 million of unsecured 7.125 percent debentures due in February
2016;
o $150 million of unsecured 6.000 percent senior notes due August 2035;
and
o An unsecured, variable rate $21 million commercial bank loan due in
December 2018 that is used to support two loans from us to the
Employee Stock Ownership Plan portion of the Darden Savings Plan.
We also have $150 million of unsecured 5.750 percent medium-term notes due
in March 2007 included in current liabilities as current portion of long-term
debt, which we plan to repay through cash flows from operations or the issuance
of unsecured debt securities in fiscal 2007.
In September 2005, we used a portion of the proceeds from our issuance of
the 4.875 percent and 6.000 percent senior notes, which were issued in August
2005, to repay $150 million of unsecured 8.375 percent senior notes at maturity.
The proceeds from the issuance of the senior notes in August 2005 and the
repayment of the $150 million of senior notes in September 2005 are included in
net cash flows used in financing activities for the quarter and six months ended
November 27, 2005. Through a shelf registration on file with the Securities and
Exchange Commission (SEC), we may issue up to an additional $300 million of
unsecured debt securities from time to time. The debt securities may bear
interest at either fixed or floating rates and will have such other terms as
determined at the time of any issuance.
A table of our contractual obligations and other commercial commitments as
of May 28, 2006 was included in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of our Annual Report on Form 10-K
for the fiscal year ended May 28, 2006. There were no significant changes to our
contractual obligations and other commercial commitments during the six months
ended November 26, 2006.
Our Board of Directors has authorized us to repurchase up to an aggregate
of 162.4 million shares of our common stock. Net cash flows used in financing
activities included our repurchase of 1.6 million shares of our common stock for
$67 million in the second quarter of fiscal 2007, compared to 1.8 million shares
for $55 million in the second quarter of fiscal 2006. For the first six months
of fiscal 2007, net cash flows used by financing activities included our
repurchase of 3.9 million shares of our common stock for $150 million compared
to 5.8 million shares for $188 million for the first six months of fiscal 2006.
As of November 26, 2006, we have repurchased a total of 136.5 million shares of
our common stock. The repurchased common stock is reflected as a reduction of
stockholders' equity.
Net cash flows provided by operating activities decreased to $38 million
and $151 million in the second quarter and first six months of fiscal 2007,
respectively, compared to $42 million and $247 million in the second quarter and
first six months of fiscal 2006 primarily as a result of the timing of purchases
of inventories and
22
restaurant level services as well as the reclassification of excess income tax
benefits from the exercise of employee stock options from an operating activity
to a financing activity as required following the adoption of SFAS No. 123(R).
Net cash flows (used in) provided by investing activities included capital
expenditures incurred principally for building new restaurants, replacing
equipment and technology initiatives. Capital expenditures were $87 million and
$182 million in the second quarter and first six months of fiscal 2007,
respectively, compared to $85 million and $166 million in the second quarter and
first six months of fiscal 2006, respectively. The increased expenditures in the
second quarter and first six months of fiscal 2007 resulted primarily from
increased spending associated with restaurant replacement assets and technology
initiatives. We also received $33 million in cash during the second quarter of
fiscal 2007 in connection with the sale and leaseback of our current Restaurant
Support Center (RSC).
Net cash flows provided by (used in) financing activities included $34
million in dividends paid in the second quarter and first six months of fiscal
2007, compared to $30 million for the same periods in fiscal 2006. On September
14, 2006, the Board of Directors declared an increase in the cash dividend to
twenty-three cents per share to be paid on November 1, 2006 to all shareholders
of record as of the close of business on October 10, 2006. Based on this
twenty-three cent semi-annual dividend declaration, our indicated annual
dividend is forty-six cents per share. Previously, we had paid a semi-annual
dividend of twenty cents per share. Additionally, cash flows provided by
financing activities for the second quarter and first six months of fiscal 2007
increased due to the reclassification of excess income tax benefits from the
exercise of employee stock options from an operating activity to a financing
activity as required following the adoption of SFAS No. 123(R).
We are not a party to any off-balance sheet arrangements that have, or are
reasonably likely to have, a current or future material effect on our financial
condition, changes in financial condition, sales or expenses, results of
operations, liquidity, capital expenditures or capital resources. We are not
aware of any trends or events that would materially affect our capital
requirements or liquidity. We believe that our internal cash generating
capabilities and borrowings available under our shelf registration statement for
unsecured debt securities and short-term commercial paper program will be
sufficient to finance our capital expenditures, dividends, stock repurchase
program and other operating activities through fiscal 2007.
FINANCIAL CONDITION
Our current assets totaled $467 million at November 26, 2006, compared to
$378 million at May 28, 2006. The increase resulted primarily from an increase
in inventories which were $284 million at November 26, 2006 compared to $199
million at May 28, 2006, principally due to seasonality.
Our current liabilities totaled $1.09 billion at November 26, 2006,
compared to $1.03 billion at May 28, 2006. Short term debt totaled $140 million
at November 26, 2006 compared to $44 million at May 28, 2006 due mainly to
significant seasonal inventory purchases during the second quarter and the use
of commercial paper to manage to desired debt leverage targets. Accrued payroll
of $99 million at November 26, 2006, decreased from $123 million at May 28,
2006, principally due to the payout of fiscal 2006 incentive compensation during
the first quarter of fiscal 2007, which is partially offset by the amounts
accrued for fiscal 2007 incentive compensation. Unearned revenues of $91 million
at November 26, 2006, decreased from $101 million at May 28, 2006, principally
due to seasonal fluctuations in sales and redemptions of our gift cards. Other
liabilities increased to $43 million at November 26, 2006 from $31 million at
May 28, 2006 principally due to the non-current portion of the deferred gain on
the sale and leaseback of the RSC in the first fiscal quarter of 2007.
CRITICAL ACCOUNTING POLICIES
We prepare our consolidated financial statements in conformity with U.S.
generally accepted accounting principles. The preparation of these financial
statements requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of sales and expenses during the reporting period (see Note 1, "Summary
of Significant Accounting Policies" under Notes to Consolidated Financial
Statements included in Item 8, "Financial Statements and Supplementary Data" of
our Annual Report on Form 10-K for the fiscal year ended May 28, 2006). Actual
results could differ from those estimates.
23
Critical accounting policies are those we believe are both most important
to the portrayal of our financial condition and operating results and require
our most difficult, subjective or complex judgments, often as a result of the
need to make estimates about the effect of matters that are inherently
uncertain. Judgments and uncertainties affecting the application of those
policies may result in materially different amounts being reported under
different conditions or using different assumptions. We consider the following
policies to be most critical in understanding the judgments that are involved in
preparing our consolidated financial statements.
LAND, BUILDINGS AND EQUIPMENT
Land, buildings and equipment are recorded at cost less accumulated
depreciation. Building components are depreciated over estimated useful lives
ranging from seven to 40 years using the straight-line method. Leasehold
improvements, which are reflected on our consolidated balance sheets as a
component of buildings, are amortized over the lesser of the expected lease
term, including cancelable option periods, or the estimated useful lives of the
related assets using the straight-line method. Equipment is depreciated over
estimated useful lives ranging from two to 10 years, also using the
straight-line method.
Our accounting policies regarding land, buildings and equipment, including
leasehold improvements, include our judgments regarding the estimated useful
lives of these assets, the residual values to which the assets are depreciated
or amortized, the determination of what constitutes expected lease term and the
determination as to what constitutes enhancing the value of or increasing the
life of existing assets. These judgments and estimates could produce materially
different amounts of reported depreciation and amortization expense if different
assumptions were used. As discussed further below, these judgments may also
impact our need to recognize an impairment charge on the carrying amount of
these assets as the cash flows associated with the assets are realized.
LEASES
We are obligated under various lease agreements for certain restaurants.
We recognize rent expense on a straight-line basis over the expected lease term,
including cancelable option periods as described below. Within the provisions of
certain of our leases, there are rent holidays and/or escalations in payments
over the base lease term, as well as renewal periods. The effects of the
holidays and escalations have been reflected in rent expense on a straight-line
basis over the expected lease term, which includes cancelable option periods
when failure to exercise such options would result in an economic penalty to the
Company. The lease term commences on the date when we have the right to control
the use of the leased property, which is typically before rent payments are due
under the terms of the lease. Many of our leases have renewal periods totaling
five to 20 years, exercisable at our option, and require payment of property
taxes, insurance and maintenance costs in addition to the rent payments. The
consolidated financial statements reflect the same lease term for amortizing
leasehold improvements as we use to determine capital versus operating lease
classifications and in calculating straight-line rent expense for each
restaurant. Percentage rent expense is generally based upon sales levels and is
accrued at the point in time we determine that it is probable that such sales
levels will be achieved.
Our judgments related to the probable term for each restaurant affect the
classification and accounting for leases as capital versus operating, the rent
holidays and escalation in payments that are included in the calculation of
straight-line rent and the term over which leasehold improvements for each
restaurant facility are amortized. These judgments may produce materially
different amounts of depreciation, amortization and rent expense than would be
reported if different assumed lease terms were used.
IMPAIRMENT OF LONG-LIVED ASSETS
Land, buildings and equipment and certain other assets, including
capitalized software costs and liquor licenses, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of the assets to the future
undiscounted net cash flows expected to be generated by the assets. Identifiable
cash flows are measured at the lowest level for which they are largely
independent of the cash flows of other groups of assets and liabilities,
generally at the restaurant level. If these assets are determined to be
impaired, the amount of impairment recognized is the amount by which the
carrying amount of the assets exceeds their fair value. Fair value is generally
determined by appraisals or sales prices of comparable assets. Restaurant sites
and certain other assets to be disposed of are reported at the lower of their
carrying amount or fair value, less estimated costs to sell. Restaurant sites
and certain other assets to be disposed of are included in assets held for sale
when
24
certain criteria are met. These criteria include the requirement that the
likelihood of disposing of these assets within one year is probable. Assets
whose disposal is not probable within one year remain in land, buildings and
equipment until their disposal is probable within one year.
The judgments we make related to the expected useful lives of long-lived
assets and our ability to realize undiscounted cash flows in excess of the
carrying amounts of these assets are affected by factors such as the ongoing
maintenance and improvements of the assets, changes in economic conditions,
changes in usage or operating performance, desirability of the restaurant sites
and other factors, such as brand repositioning efforts, as in the case of Smokey
Bones. As we assess the ongoing expected cash flows and carrying amounts of our
long-lived assets, significant adverse changes in these factors could cause us
to realize a material impairment charge. During fiscal 2005, based on an
evaluation of expected cash flows, we recognized asset impairment charges of $6
million ($4 million after-tax) for the write-down of two Olive Garden
restaurants, one Red Lobster restaurant and one Smokey Bones restaurant, all of
which were closed in fiscal 2006. During fiscal 2006, based on an evaluation of
expected cash flows, we recognized charges of $10 million ($6 million after-tax)
primarily related to the closing of three Smokey Bones restaurants and the
impairment of two other Smokey Bones restaurants, which continue to operate.
During the six months ended November 26, 2006, based on an evaluation of
expected cash flows, we recognized charges of $5 million ($3 million after-tax)
primarily related to the impairment of one Olive Garden restaurant, which was
closed, and three Smokey Bones restaurants, two of which continue to operate.
INSURANCE ACCRUALS
Through the use of insurance program deductibles and self-insurance, we
retain a significant portion of expected losses under our workers' compensation,
employee medical and general liability programs. However, we carry insurance for
individual claims that generally exceed $0.25 million for workers' compensation
and general liability claims. Accrued liabilities have been recorded based on
our estimates of the anticipated ultimate costs to settle all claims, both
reported and not yet reported.
Our accounting policies regarding these insurance programs include our
judgments and independent actuarial assumptions regarding economic conditions,
the frequency or severity of claims and claim development patterns and claim
reserve, management and settlement practices. Unanticipated changes in these
factors may produce materially different amounts of reported expense under these
programs.
INCOME TAXES
We estimate certain components of our provision for income taxes. These
estimates include, among other items, depreciation and amortization expense
allowable for tax purposes, allowable tax credits for items such as taxes paid
on reported employee tip income, effective rates for state and local income
taxes and the tax deductibility of certain other items.
Our estimates are based on the best available information at the time that
we prepare the provision. We generally file our annual income tax returns
several months after our fiscal year-end. Income tax returns are subject to
audit by federal, state and local governments, generally years after the returns
are filed. These returns could be subject to material adjustments or differing
interpretations of the tax laws.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
In March 2006, the Emerging Issues Task Force (EITF) issued EITF Issue
06-3, "How Taxes Collected from Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement (That is, Gross versus
Net Presentation)." Entities may adopt a policy of presenting sales taxes in the
income statement on either a gross or net basis. If taxes are significant, an
entity should disclose its policy of presenting taxes and the amount of taxes.
The guidance is effective for periods beginning after December 15, 2006. We
present sales net of sales taxes. Accordingly, this issue will not impact the
way we record these sales taxes in our consolidated financial statements.
In June 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of SFAS No. 109" (FIN 48). FIN 48 clarifies the accounting for
uncertain income tax positions accounted for in accordance with SFAS No. 109.
The interpretation stipulates recognition and measurement criteria in addition
to classification, interim period accounting and significantly
25
expanded disclosure provisions for uncertain tax positions that are expected to
be taken in a company's tax return. FIN 48 is effective for fiscal years
beginning after December 15, 2006. We have not yet determined the impact the
adoption of FIN 48 will have, if any, on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans (an amendment of FASB
Statements No. 87, 88, 106 and 132R)." SFAS No. 158 is effective as of the end
of fiscal years ending after December 15, 2006. The purpose of SFAS No. 158 is
to improve the overall financial statement presentation of pension and other
postretirement plans, but SFAS No. 158 does not impact the determination of net
periodic benefit cost or measurement of plan assets or obligations. SFAS No. 158
requires companies to recognize the over or under funded status of the plan as
an asset or liability as measured by the difference between the fair value of
the plan assets and the benefit obligation and requires any unrecognized prior
service costs and actuarial gains and losses to be recognized as a component of
accumulated other comprehensive income (loss). Additionally, SFAS No. 158 no
longer allows companies to measure their plans as of any date other than as of
the end of their fiscal year, however, this provision is not effective for
companies until fiscal years ending after December 15, 2008. Since we measure
our plan assets and obligations on an annual basis, we will not be able to
determine the impact the adoption of SFAS No. 158 will have on our consolidated
financial statements until the end of the current fiscal year when such
valuation is completed. However, based on valuations performed in fiscal 2006,
had we been required to adopt the provisions of SFAS No. 158 as of May 28, 2006,
our defined benefit plans and postretirement benefit plan would have been $7
million and ($18 million) over (under) funded, respectively. To recognize our
over (under) funded positions and to appropriately record our unrecognized prior
service costs and actuarial gains and losses as a component of accumulated other
comprehensive income (loss), we would have been required to decrease our
stockholders' equity by $35 million on an after-tax basis.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when quantifying Misstatements in Current Year Financial
Statements" (SAB 108). SAB 108 is effective for the first fiscal year ending
after November 15, 2006. SAB 108 requires companies to evaluate the materiality
of identified unadjusted errors on each financial statement and related
financial statement disclosure using both the rollover approach and the iron
curtain approach, as those terms are defined in SAB 108. The rollover approach
quantifies misstatements based on the amount of the error in the current year
financial statement, whereas the iron curtain approach quantifies misstatements
based on the effects of correcting the misstatement existing in the balance
sheet at the end of the current year, irrespective of the misstatement's year(s)
of origin. Financial statements would require adjustment when either approach
results in quantifying a misstatement that is material. Correcting prior year
financial statements for immaterial errors would not require previously filed
reports to be amended. If a company determines that an adjustment to prior year
financial statements is required upon adoption of SAB 108 and does not elect to
restate its previous financial statements, then it must recognize the cumulative
effect of applying SAB 108 in fiscal 2007 beginning balances of the affected
assets and liabilities with a corresponding adjustment to the fiscal 2007
opening balance in retained earnings. We are currently evaluating the impact of
SAB 108 on our consolidated financial statements.
FORWARD-LOOKING STATEMENTS
Certain statements included in this report and other materials filed or to
be filed by us with the SEC (as well as information included in oral or written
statements made or to be made by us) may contain statements that are
forward-looking within the meaning of the Private Securities Litigation Reform
Act of 1995, as codified in Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the
Exchange Act). Words or phrases such as "believe," "plan," "will," "expect,"
"intend," "estimate" and "project," and similar expressions are intended to
identify forward-looking statements. All of these statements, and any other
statements in this report that are not historical facts, are forward-looking.
These forward-looking statements are based on assumptions concerning important
factors, risks and uncertainties that could significantly affect anticipated
results in the future and, accordingly, could cause the actual results to differ
materially from those expressed in the forward-looking statements. These
factors, risks and uncertainties include, but are not limited to those discussed
below and in Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K
for the year ended May 28, 2006:
o the intensely competitive nature of the restaurant industry, especially
pricing, service, location, personnel and type and quality of food;
26
o economic and business factors, both specific to the restaurant industry
and generally, including changes in consumer preferences, demographic
trends, fuel prices, severe weather conditions including hurricanes, a
protracted economic slowdown or worsening economy, industry-wide cost
pressures and public safety conditions, including actual or threatened
armed conflicts or terrorist attacks;
o the price and availability of food, ingredients and utilities, including
the general risk of inflation;
o labor and insurance costs, including increased labor costs as a result of
federal and state-mandated increases in minimum wage rates and increased
insurance costs as a result of increases in our current insurance
premiums;
o increased advertising and marketing costs;
o higher-than-anticipated costs to open, close, relocate or remodel
restaurants;
o litigation by employees, consumers, suppliers, shareholders or others,
regardless of whether the allegations made against us are valid or we are
ultimately found liable;
o unfavorable publicity relating to food safety, communicable illnesses or
other concerns;
o a lack of suitable new restaurant locations or a decline in the quality of
the locations of our current restaurants;
o federal, state and local regulation of our business, including laws and
regulations relating to our relationships with our employees, zoning, land
use, environmental matters and liquor licenses;
o growth objectives, including lower-than-expected sales and profitability
of newly-opened restaurants, our expansion of newer concepts that have not
yet proven their long-term viability, our ability to develop new concepts,
risks associated with growth through acquisitions and our ability to
manage risks relating to the opening of new restaurants, including real
estate development and construction activities, union activities, the
issuance and renewal of licenses and permits, the availability of funds to
finance growth and our ability to hire and train qualified personnel; and
o our plans to improve the financial performance of Bahama Breeze and Smokey
Bones and reposition the Smokey Bones brand.
Since it is not possible to foresee all such factors, risks and uncertainties,
investors should not consider these factors to be a complete list of all risks
or uncertainties.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a variety of market risks, including fluctuations in
interest rates, foreign currency exchange rates and commodity prices. To manage
this exposure, we periodically enter into interest rate, foreign currency
exchange and commodity instruments for other than trading purposes.
We use the variance/covariance method to measure value at risk, over time
horizons ranging from one week to one year, at the 95 percent confidence level.
As of November 26, 2006, our potential losses in future net earnings resulting
from changes in foreign currency exchange rate instruments, commodity
instruments and floating rate debt interest rate exposures were approximately
$10 million over a period of one year. The value at risk from an increase in the
fair value of all of our long-term fixed rate debt, over a period of one year,
was approximately $46 million. The fair value of our long-term fixed rate debt
during the first six months of fiscal 2006 averaged $628 million, with a high of
$637 million and a low of $617 million.
Our interest rate risk management objective is to limit the impact of
interest rate changes on earnings and cash flows by targeting an appropriate mix
of variable and fixed rate debt.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our Chief Executive Officer and our Chief Financial Officer, we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as
of November 26, 2006, the end of the period covered by this report. Based on
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective as of
November 26, 2006.
During the fiscal quarter ended November 26, 2006, there was no change in
our internal control over financial reporting (as defined in Rule 13a-15(f)
under the Exchange Act) that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
27
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are subject to private lawsuits, administrative proceedings and claims
that arise in the ordinary course of our business. A number of these lawsuits,
proceedings and claims may exist at any given time. These matters typically
involve claims from guests, employees and others related to operational issues
common to the restaurant industry and can also involve infringement of, or
challenges to, our trademarks. While the resolution of a lawsuit, proceeding or
claim may have an impact on our financial results for the period in which it is
resolved, we believe that the final disposition of the lawsuits, proceedings and
claims in which we are currently involved, either individually or in the
aggregate, will not have a material adverse effect on our financial position,
results of operations or liquidity. The following is a brief description of the
more significant of these matters. In view of the inherent uncertainties of
litigation, the outcome of any unresolved matters described below cannot be
predicted at this time, nor can the amount of any potential loss be reasonably
estimated.
Like other restaurant companies and retail employers, we have been faced
in a few states with allegations of purported class-wide wage and hour
violations. In August 2003, three former employees in Washington filed a
purported class action in Washington State Superior Court in Spokane County
alleging violations of Washington labor laws with respect to providing rest
breaks. The Court stayed the action and ordered the plaintiffs into our
mandatory arbitration program. We believe we provided the required meal and rest
breaks to our employees, and we intend to vigorously defend our position in this
case.
Beginning in 2002, a total of five purported class action lawsuits were
filed in Superior Courts of California (two each in Los Angeles County and
Orange County, and one in Sacramento County) in which the plaintiffs allege that
they and other current and former service managers, beverage and hospitality
managers and culinary managers were improperly classified as exempt employees
under California labor laws. The plaintiffs sought unpaid overtime wages and
penalties. Two of the cases were removed to arbitration under our mandatory
arbitration program, one was stayed to allow consideration of judicial
coordination with the other cases, one is proceeding as an individual claim, and
one remains a purported class action litigation matter. Although we believe we
correctly classified these employees, to avoid potentially costly and protracted
litigation, we agreed in fiscal 2006 to a settlement. Without admitting any
liability, we agreed to pay up to a maximum total of $11 million to settle all
five cases, which was fully accrued as of May 28, 2006 and is included in other
current liabilities at November 26, 2006. The settlement agreement has received
preliminary court approval and we expect final court approval and payment of the
settlement proceeds to occur before the end of fiscal 2007.
On March 23, 2006, we received a notice that the staff of the U.S. Federal
Trade Commission (FTC) was conducting an inquiry into the marketing of gift
cards issued by us and other companies. We cooperated with the staff, provided
information and made some voluntary adjustments to the disclosure of dormancy
fees related to our gift cards. On July 26, 2006, we were notified that the FTC
staff had concluded that we had violated Section 5 of the FTC Act by allegedly
failing to give adequate notice to consumers that our gift cards, if not used
for 24 consecutive months, were subject to a gradual reduction in value by a
dormancy fee. We discontinued the imposition of dormancy fees on October 12,
2006 and informed the FTC staff of our action. On November 9, 2006, a member of
the FTC staff informed us that unless we entered into an administrative consent
order regarding gift card marketing, the FTC staff would recommend to the
Commission that it institute an administrative proceeding against us based on
our past practices. The proposed consent order and administrative complaint
primarily would impose disclosure requirements should we resume imposing
dormancy fees. Neither the proposed order nor the proposed complaint sought
monetary relief. We have not agreed to enter into the consent order, and do not
know whether an administrative complaint will be brought against us. We believe
our gift card marketing practices have complied with all applicable laws, and if
a compliant is issued, we intend to vigorously defend our position.
ITEM 1A. RISK FACTORS
There has been no material change in the risk factors set forth in Part I,
Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended May
28, 2006.
28
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The table below provides information concerning our repurchase of shares
of our common stock during the quarter ended November 26, 2006. Since commencing
repurchases in December 1995, we have repurchased a total of 136.5 million
shares through November 26, 2006 under authorizations from our Board of
Directors to repurchase an aggregate of 162.4 million shares.
--------------------------------------------------------------------------------------------------
Total Number of Maximum Number of
Shares Purchased as Shares that
Total Number Average Part of Publicly May Yet be Purchased
of Shares Price Paid Announced Plans or Under the Plans or
Period Purchased (1) per Share Programs Programs (2)
--------------------------------------------------------------------------------------------------
August 28, 2006 through
October 1, 2006 420,108 $41.86 420,108 27,148,232
--------------------------------------------------------------------------------------------------
October 2, 2006 through
October 29, 2006 26 $42.89 26 27,148,206
--------------------------------------------------------------------------------------------------
October 30, 2006 through
November 26, 2006 1,210,165 $40.85 1,210,165 25,938,041
--------------------------------------------------------------------------------------------------
Total 1,630,299 $41.11 1,630,299 25,938,041
--------------------------------------------------------------------------------------------------
(1) All of the shares purchased during the quarter ended November 26, 2006
were purchased as part of our repurchase program, the most recent
increased authority for which was announced in a press release issued on
June 20, 2006. There is no expiration date for our program. The number of
shares purchased includes shares withheld for taxes on vesting of
restricted stock, shares delivered or deemed to be delivered to us on
tender of stock in payment for the exercise price of options, and shares
reacquired pursuant to tax withholding on option exercises. These shares
are included as part of our repurchase program and deplete the repurchase
authority granted by our Board. The number of shares repurchased excludes
shares we reacquired pursuant to forfeiture of restricted stock.
(2) Repurchases are subject to prevailing market prices, may be made in open
market or private transactions and may occur or be discontinued at any
time. There can be no assurance that we will repurchase any shares.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Our Annual Meeting of Shareholders was held on September 15, 2006.
(b) The name of each director elected at the meeting is provided in Item 4(c)
of this report. There are no other directors with a term of office that
continued after the Annual Meeting.
(c) At the Annual Meeting, the shareholders took the following actions:
(i) Elected the following thirteen directors:
For Withheld
----------- ----------
Leonard L. Berry. 71,647,210 59,140,016
Odie C. Donald. 71,630,310 59,156,917
David H. Hughes. 71,743,510 59,043,716
Charles A. Ledsinger, Jr. 124,959,613 5,827,614
William M. Lewis, Jr. 126,629,510 4,157,716
Senator Connie Mack, III 71,371,720 59,415,507
Andrew H. Madsen. 71,761,838 59,025,388
Clarence Otis, Jr. 70,424,968 60,362,259
Michael D. Rose. 69,897,876 60,889,350
Maria A. Sastre. 71,661,585 59,125,641
Jack A. Smith. 71,578,432 59,208,795
Blaine Sweatt, III 71,692,305 59,094,922
Rita P. Wilson. 71,702,680 59,084,546
29
(ii) Approved the Amended Darden Restaurants, Inc. 2002 Stock Incentive
Plan.
For 94,698,696
Against 20,628,446
Abstain 1,175,092
Broker Non-Vote 14,284,992
(iii) Ratified the appointment of KPMG LLP as our independent registered
public accounting firm for the fiscal year ending May 27, 2007.
For 121,374,765
Against 8,452,331
Abstain 950,131
Broker Non-Vote 0
(iv) Approved a shareholder proposal regarding a majority vote standard
for election of directors.
For 70,835,406
Against 42,865,038
Abstain 2,801,791
Broker Non-Vote 14,284,992
ITEM 6. EXHIBITS
Exhibit 12 Computation of Ratio of Consolidated Earnings to Fixed
Charges.
Exhibit 31(a) Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31(b) Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32(a) Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32(b) Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DARDEN RESTAURANTS, INC.
Dated: January 3, 2007 By: /s/ Paula J. Shives
-----------------------------------
Paula J. Shives
SENIOR VICE PRESIDENT,
GENERAL COUNSEL AND SECRETARY
Dated: January 3, 2007 By: /s/ C. Bradford Richmond
-----------------------------------
C. Bradford Richmond
SENIOR VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
31
INDEX TO EXHIBITS
Exhibit
Number Exhibit Title
------- -------------
12 Computation of Ratio of Consolidated Earnings to Fixed Charges.
31(a) Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31(b) Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32(a) Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32(b) Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32